An insurance company is offering an annuity product that costs 30,000 today and entitles you to...

An insurance company is offering an annuity product that costs 30,000 today and entitles you to receive ten annual payments of 3750 from the insurance company. what interest rate is embedded in the pricing of this annuity product?

a- 4.28%

b- 3.18%

c-4.56%

d 3.86%

Solutions

Expert Solution

Cost of Annuity = 30,000
Annual Payment = 3,750
Number of Payments = 10

Let annual interest rate be i%

30,000 = 3,750 * PVIFA(i%, 10)

Using financial calculator:
N = 10
PV = -30000
PMT = 3750
FV = 0

I = 4.28%

Annual interest rate = 4.28%

So, interest rate of 4.28% is embedded in the pricing of this annuity product.

jeff jeffy answered 1 year ago

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